Democracy, Populism and the Tyranny of the Experts, Part 12

Back in 1986 I launched a wealth management firm I conceitedly called “Greycourt” – it’s an anagram for my name. The firm met with modest success and in 1988 I incorporated it. I was probably the most hopeless, bumbling entrepreneur in the history of private enterprise, but somehow I’ve been with Greycourt for 31 years.

For the first decade or so of its life Greycourt had no minimum account size. Our mission – and we were passionate about it – was to bring sophisticated, conflict-free advice to anyone who wanted it, rich or poor.

I know that sounds like Anatole France, who sneered at the majesty of the law forbidding “the rich as well as the poor to sleep under the bridges.” But we actually did have relatively poor clients. Almost one-quarter of our customers had life savings of $100,000 or less, and our smallest client, a cleaning lady, entrusted Greycourt with almost $15,000. These people found us via a vast and annoying series of radio and print ads that are legendary – not to say notorious – to this day.

An important part of our mission was to educate our clients about investing, with the result that engaging Greycourt was a bit like signing yourself up for a course in applied capital markets theory. For example, we didn’t just create an asset allocation strategy for our clients, we sent them a long and detailed memo describing what asset allocation was all about and why it was important. Their actual strategy was a mere one-page attachment to the memo.

Similarly, we didn’t just select money managers and funds for our clients, we sent them a long memo about the difficulties associated with selecting managers and the trouble managers had sustaining good performance. The actual managers we picked for them were shown on a two-page attachment.

Needless to say, these instructional materials generated a massive volume of questions and concerns, with the result that we spent many hours meeting in person and on the phone with clients who had $42,000 to invest. We didn’t think of these meetings as hopeless time sinks, we thought of them as investment seminars.

All this was unheard-of at a time in financial history when, more typically, clients would send Merrill Lynch their $90,000 IRAs and say, “Get me some good returns.” Everything else happened inside the black box at Merrill, with the result that the clients had no clue what was going on, including whether or not they were getting “good returns.”

We believed that having educated clients was not just to the clients’ advantage, but also to ours. Educated clients, we believed, were less likely to flee at the first sign of trouble. We turned out to be right about that, but unfortunately the number of people who wanted to be educated about investing turned out to be vastly smaller than I had hoped. Of the then-262 million people in America, only about 300 hired us. Greycourt’s initial business model was an artistic success, but it was a financial disaster, nearly sending me packing off to the poorhouse.

If Greycourt had been born ten years after it actually was born – that is to say, if it had been born after Al Gore invented the Internet – the business model might have worked. We would have been able to deliver our advice online and might have used artificial intelligence to design portfolios and respond to questions light years faster than we were able to do by hand. Instead of 300 clients we might have had 262 million. Alas, it was not to be. We “pivoted” to our current business model.

The advisors who worked at Greycourt in those days were certainly financial experts who knew many times more about investing than any individual client. But the remarkable thing about pushing knowledge outside this little group of experts was that, in the aggregate, the clients ended up knowing much more about investing than we did.

By the end of the first decade of its life, Greycourt’s financial experts had learned far more from the clients than the clients had learned from us. This revelation is something you don’t easily forget. It continues to inform the way we work with clients, and it provided the spark for this series on the tyranny of the experts.

It was the early Greycourt experience, and my own forty years as a member of two expert priesthoods (law and finance), that led me to formulate The Universal Law of Expertise that I posited last week: Experts gain vast knowledge, and then they hog that knowledge from everybody else until it degenerates into dogma via groupthink.

The fact that experts do in fact accumulate a great deal of specialized knowledge is the justification for their existence. The fact that they hog it –ending up dumber in the long run than they should be, and holding back the progress of the broader society – is the justification for destroying expert priesthoods before they can degenerate into groupthink.

Next week we’ll see how this has worked out over the course of human history.

Next up: DP&TE, Part 13

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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.